China orders banks to set aside more reserves

April 30, 2007 - 0:0
HONG KONG (Bloomberg) -- China ordered banks to set aside more money as reserves for the seventh time in 11 months to try to prevent an accelerating economy from overheating.

Lenders must put aside 11 percent of deposits starting May 15, up from 10.5 percent, the central bank said on its website.

Premier Wen Jiabao is trying to stop a flood of cash from an export boom from fueling wasteful investment, inflation and a stock market bubble. China's benchmark share index has rebounded 41 percent after the Feb. 27 plunge that sparked a global equities rout. “The liquidity problem is the hardest to deal with,” said Kent Yau, an economist at Core Pacific-Yamaichi International Ltd. in Hong Kong. “If it fuels consumption, it's a happy thing, but the government is growing more concerned that it will fund investment or go into the stock markets.”

Economic growth accelerated to 11.1 percent in the first quarter, driven by a trade surplus that almost doubled to $46.4 billion. That outpaced economists' forecasts and the 10.4 percent growth of the previous quarter.

Inflation reached a more than two-year high of 3.3 percent in March. Banks made 1.4 trillion yuan of new loans in the first quarter, nearly half the total for last year.

Each 0.5 percentage point increase in banks' reserve requirements removes about 170 billion yuan ($22 billion) from the financial system.

China has raised borrowing costs three times since April last year. The benchmark one-year lending rate is at an eight-year high of 6.39 percent. The government has also curbed land use, restricted project approvals, and cut export rebates for steel and textiles to discourage investment. -----------------Lifting rates

“Policy is too accommodative,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland Plc in Hong Kong, before the central bank's latest move. “They just need to gradually hike rates to deter companies using low borrowing costs to chase market share” without having to worry about profit margins.

China's CSI 300 stock index fell 4.7 percent on April 19; the day first-quarter economic data was released, on speculation that fast growth would trigger an interest-rate increase. That was the biggest one-day fall since the nine percent plunge at the end of February that triggered a global share rout. The index is up 70 for the year.

The stock market bubble is “getting bigger,” Cheng Siwei, a senior Chinese lawmaker, said in a presentation in Hong Kong on April 20. -----------------Strengthening controls

Premier Wen Jiabao has pledged stronger controls on investment in factories and property, lending curbs, and a narrowing of a trade surplus that last year reached a record $177.5 billion.

The government “needs to take a combination of economic and legal measures to strengthen macro controls, speed up economic restructuring and prevent the economy from growing overheated,” Wen said after the first-quarter economic data was released.

The National Development and Reform Commission, China's top economic planning body, on April 26 expressed concern about the environmental and economic effects of an 18.3 percent rise in industrial production in the first quarter. Accelerating production “may lead to fluctuations in the economy,” said Zhu Hongren, the deputy economic director, at a press conference in Beijing. “It's important to improve the quality of economic growth.”

China may face a fourth summer of power shortages as the expansion strains oil and coal supplies, the planning agency said April 26.

Fixed-asset investment in urban areas climbed 25.3 percent in the first quarter from a year earlier, up from the 24.5 percent pace for all of 2006. It rose 29.8 percent in the first quarter last year.

Besides increasing borrowing costs and bank reserve requirements, the People's Bank of China sells bonds to soak up cash.

The world's fourth-largest economy has grown by at least 10 percent for each of the past four years and the 10.7 percent expansion in 2006 was the biggest in 11 years.